When we look to the US, and around the world, an unexpected economic development is unfolding.
Homebuilders are on a tear in the US, and their Australian counterparts are also experiencing record levels of activity. Senior executives of some of Australia’s largest domestic homebuilders are reporting contract volumes being at their highest levels ever.
In the US, Homebuilders as measured by the Dow Jones US Select Home Construction Index (DJSHMB) are a long way from their bottom in 2009…
In fact, the sector is up more than 800% since then. But it wasn’t until earlier this month that it finally broke out to new all-time highs.
For the first time since 2005, homebuilders are in uncharted territory.
That’s a scary thing. The idea of buying homebuilder stocks at higher levels than we saw just before the great housing bust might sound outrageous… But don’t be fooled.
History tells us more upside is ahead for this sector, even after hitting new highs. And 24% gains are possible over the next year.
We reported recently on the coming Commodity Super-cycle, fed by diabolical levels of government stimulus and Central Bank intervention, and the evidence for centrally controlled price distortions are beginning to appear in many segments.
Attached to the increase in homebuilder activity has been an explosion in Lumber prices. The publicly traded Lumber Futures contracts have seen prices rise from a mid-COVID trough of approx US250.00, to over 850.
The increase in framing timber has resulted in an increase home build cost of approx $5,000-$14,000 according to research on the matter.
Increased global supply chain disruption is likely to add further price pressure on other key material inputs, in turn putting pressure on overall inflation numbers. Reports of extortionate price gouging by shipping lines, out of major Chinese ports are also beginning to filter through to the market.
For now, associated general inflation seems subdued, likely due to significantly softer consumption across other segments, although homebuilders are a bright-spot of economic activity in many developed markets.
From an investment and trading perspective, the question of “what’s next” for the booming sector might make you nervous. After all, homebuilders can’t keep this up, right?
Actually… they can. At least, that’s what more than 20 years of data shows according to Chris Iglou of Daily Wealth.
The data suggests that contrary to what many may believe, buying these new all-time highs has a positive predictive influence to support further gains. The chart below from Stanberry Research outlines it in a little more detail.
So, as many sectors of the economy suffer critically from government imposed restrictions, under the guise of ‘COVID-protections’, counter-intuitively, the homebuilder segment is powering along, and seems set to continue. Many countries are already actively supporting the sector, with the Australian government recently launching a $25,000AUD incentive for new first-home owners.
As governments seek to rebuild economies post-COVID, the expected stimulus programs centred around infrastructure and construction are likely to see current trajectories continue, with further support for our Commodity Supercycle thesis.
Chart of the Day
Why Homebuilder ETFs are Soaring Amid Pandemic
Buzz Lightyear and Lumbar… Who would have thought. Based on this. ASX.BLD will be up tomorrow with earnings being released. Market seems to think so, 2.1% up today. Govt Stimulus + Kerry Stokes + Negative Real Rates = Happy days for housing market.
REH and RWC are too other examples of this boom taking place.. SO….. does this make REA look cheap now ? (Hmmm when do tech stocks ever look cheap….) Rephrase….. So……. Maybe REA is a buy then ?